Once Unthinkable Bond Yields Are Now the New Normal for Markets
It was the week that bond markets finally seemed to grasp what central bankers have been warning all year: higher interest rates are here to stay.
From the US to Germany to Japan, yields that were almost unthinkable at the start of 2023 are now within reach. The selloff has been so extreme it’s forced bullish investors to capitulate and Wall Street banks to tear up their forecasts.
Yields on 10-year German debt are close to 3%, a level not reached since 2011. Their US equivalent are back in line with the average from before the Global Financial Crisis and within striking distance of 5%.
The question now is how much higher they can go, with no real top in sight after key levels were broken. While some argue the moves have already gone too far, others are calling it the new normal, a return to the world that prevailed before the era of central bank easy money distorted markets with trillions of dollars of bond buying.
The implications stretch far beyond markets to the rates paid on mortgages, student loans and credit cards, and to the growth of the global economy itself.
At the heart of the selloff were the world’s longest-dated government securities, those most exposed to the ever growing list of headwinds. Oil prices are rising, the US government is piling on more debt and at risk of another shutdown, and tensions with China are on the rise. For anyone who doubted the tough inflation-fighting talk of Jerome Powell and Christine Lagarde against this backdrop, the read-across is not pretty.